It should have been hailed as good news. Instead, the move by 30 year mortgage rates back below 6% was largely overshadowed by other events:

• In quick succession, the government launched a huge mortgage bailout package and a half-point cut in interest rates, and considered direct intervention in banks.
• None of the above calmed financial markets, as stock market declines actually accelerated upon passage of the mortgage relief bill.
• Even the price of oil came under such pressure that OPEC called an emergency meeting.

So what is a mortgage shopper to do? Take advantage of lower rates, or stay on the sidelines until the world financial turmoil subsides?

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According to the Wall Street Journal, a new type of home  financing has come to town. And you don’t need equity to get it. It works this way: An investment company advances you funds–10 to 15% of the current value of your house. You make no payments. You have use of the money until you sell your home. Then, the finance company gets half of your equity. Some of them require that you pay back the funds you were advanced, others do not.

All of them require that you maintain and pay your taxes on the property, and that you don’t sell for a minimum number of years without paying a stiff penalty. In addition, you cannot refinance or take on additional home equity debt without their approval. However, if your home doesn’t increase in value you are not penalized and in some cases won’t even have to pay the loan back!

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Mortgage rates, which had enjoyed a sustained downtrend through mid-September, rose for the second consecutive week, as of October 2, 2008.

This rise was despite the fact that the mortgage bailout bill seemed to have edged a step closer to passage by achieving overwhelming Senate approval. The rise also appeared to occur into the headwind of bad economic news, as factory orders were reported to have dropped sharply in August, while new jobless claims rose.

The contradiction is that the bailout bill is supposed to give lenders more confidence, while interest rates in general typically fall during an economic slowdown. Despite this, mortgage rates rose. So what is going on here?

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Most mortgage borrowers know that underwriters look at their debt-to-income ratios when determining how much home they qualify to buy. But most don’t know that Fannie Mae and Freddie Mac give them “extra credit” for any non-taxable income they receive. According to Fannie Mae and Freddie Mac underwriting guidelines,this income can be “grossed up” or increased by 25%. Because it’s not taxable it’s worth more to you–and more to your underwriter. So whether it’s a government pension, interest on muni bonds, Social Security, child support, or whatever–make sure you tell your loan officer that the income is tax-free. And be prepared to supply documents proving it. You might find yourself able to afford more than you thought.